Nowadays system trading is a popular and common way of trading. This Toptrader’s spotlight will be about Larry Hite who is, along with Ed Seykota, one of the forefathers of system trading. Larry Hite is his approach of trading and mainly his focus on respecting risk is one which can be very insightful for other traders. In his early career Hite’s his interest in the financial markets was sparked by a college course. Although it eventually took a long but very interesting path before he ended up in Wall Street.
Hite is early career path is probably as far from Wall Street as you can possible be. He was not one of the A-students, had a string of weird jobs and never stayed very long at one. Eventually he started working as an actor, screenwriter and rock promoter. After this detour Hite returns to his real interest which are financial markets. Although he was interested in futures, Hite started out as being a stockbroker. A funny story he refers to in his interview in Market Wizards is that during his interview for his job as a stockbroker the man who interviews him told him that they only “bought blue chips for their clients”. Not having a financial background Hite was not familiar with the term “blue chips”. Back home he learned that the origin of the term can be traced to the color of the most expensive chip in Monte Carlo casinos. This made Hite think that financial markets and gambling are linked. His idea was that being successful was just a matter of odds.
Over the years Hite started to realize that markets are not efficient. This is against the general academic opinion. He noticed that everyone who has ever told him that the markets are efficient is poor. According to Hite you can develop a winning system on a computer which is supposed to arbitrage all inefficiencies out of the market, eventually people trade these systems which makes them exposed to mass human behavior.
After a decade Hite learned all the ingredients about trading he needed for successful long-term trading. The last step set towards the ultimate formation of Mint Investment Management Company was bringing two important members to the team. Hite realized that his trading ideas needed to be subjected to strong statistical testing, therefore he did bring Peter Matthews on board. One year later, Michael Delman joined, who is a designer of computer systems. Together they provided the mathematical for Hite his trading ideas in a systemic manner.
The objective of Mint doesn’t necessarily focuses on making the largest possible return. Instead the philosophy is to aim for the best growth rate consistent with extremely rigorous risk controls. And Mint really shines when it comes to the results based on this philosophy. From the start in April 1981 till mid-1988, Mint registered an average annual compounded return of over 30%. Most impressive in these results is how consistent they are. Their largest loss in any six-month period was only -15%, while for any 12-month period it’s only -1%. Keep in mind that it’s for any 6/12-month period, not just calendar years. These stellar results resulted in a spectacular growth of equity under management. From only $2 million when they began trading, to over $800 million.
Mint’s most important rules for risk
There are four important rules that inherent to Mint their tolerance towards risks. These are useful for any trader.
#1 No more than 1% of total equity on any trade
A rule we seen with many other traders is that you should never risk more than 1% of total equity on any trade. Keeping the risk small and constant is absolutely critical in trading success. An important statement Hite makes is “Risk is no-fooling-around game; it does not allow for mistakes, If you do not manage the risk, eventually they will carry you out.”
#2 Follow the trend and never deviate from your strategy
Stay true to your specific trading rules which you have tested. Don’t deviate from it when the market turns against you. At Mint they had a written agreement that none of them was able to countermand their trading system.
Important to realize is that there are four kinds of trades; good trades, bad trades, winning and losing trades. A bad trade doesn’t mean it is a losing trade and vice versa.
Mint is trading on probably more markets worldwide than any other money manager (according to Hite). Besides that, they don’t rely on just one system but have a system of different systems, both short and long term.
Track volatility. When the market gets really volatile it can skew your expected return/risk ratio, stop trading in such markets.
After more than three decades in commodity trading, Hite chose in 2000 to focus on his family office activities. These family office (Hite Capital Management) activities include proprietary trading and funding of R&D in the field of systematic trading.
In 2010 Hite joined International Standard Asset Management (ISAM) to create a platform of hedge fund strategies as well as a fund of managed accounts.
Hite’s opinion on market efficiency differs from the general idea hold in the academic world, which states that markets are efficient and can’t be exploited for additional profits. The trading approach held by Hite strongly relies on respecting market risk.